A publicly traded partnership (PTP) is a partnership with interests publicly traded on an established securities market or readily tradable on a secondary market. PTP status is an important analysis or U.S. federal tax purposes.
Generally, if a company wants to go public with an initial public offering (IPO), the default structure is a corporation under state law. However, a corporation may not be the most advantageous structure given the organization’s business operations and tax profile.
What is the Tax Treatment of a PTP?
Corporations are generally subject to double taxation. A limited partnership (LP) is, by default, treated as a partnership for federal tax purposes. However, if a partnership is publicly traded, under Internal Revenue Code (IRC) Section 7704(a), the PTP would be taxable as a corporation unless it meets an exception in Section 7704(c).
Under IRC Sections 469(k)(2) and 7704(b), the term “publicly traded partnership” means any partnership if (1) the interests in such partnership are traded on an established securities market1 or (2) interests in such partnership are readily tradable on a secondary market (or the substantial equivalent thereof).2
Under IRC Section 7704(c)(1), the corporate tax treatment shall not apply to a PTP if it meets the gross income requirements under Section 7704(c)(2). If 90 percent or more of a PTP’s gross income is qualifying income, the corporate tax treatment shall not apply.3
Under Section 7704(d)(1), qualifying income includes the following types of gross income:
- Interest
- Dividends
- Real Property Rents
- Gain from the sale of real property
- Income from the exploration, development, mining or production, processing, refining, transportation, or marketing of any mineral or natural resource, industrial source carbon dioxide, or the transportation or storage of any fuel described above
- Any gain from the sale of capital assets held for the production of income described above
- Income and gains from commodities or futures, forwards, and options with respect to commodities.
Example of a Publicly Traded Partnership (PTP)
Company A LP (the “Company”) primarily engages in the midstream natural gas and intrastate transportation and storage business. The Company wants to list its limited partnership units on the New York Stock Exchange (NYSE).
Company A LP goes public, and the LP units are now publicly traded on an established securities market. The Company reviews the Section 7704(c) requirements and determines that more than 90 percent of its gross income is qualifying income. So, the LP can keep its pass-through tax treatment as a partnership.
Annual Reporting Requirements
The Company must file an annual Form 1065 (US Return of Partnership Income) and provide each partner with a Schedule K-1 (Form 1065). The LP is not directly subject to federal income taxes. The LP owners are responsible for reporting their allocable share of income and expenses on their tax returns and paying any required income taxes.